SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended September 30, 2002 or
------------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number 0-6508
------
IEC ELECTRONICS CORP.
--------------------------------------------------------------------------------
Exact name of registrant as specified in its charter
Delaware 13-3458955
--------------------------------------------------------------------------------
State or other jurisdiction of IRS Employer ID No.
incorporation or organization
105 Norton Street, Newark, New York 14513
--------------------------------------------------------------------------------
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: 315-331-7742
------------
Securities registered pursuant to Section 12(b) of the Act:
-----------------------------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
-----------------------------------------------------------
Common Stock, $.01 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
Page 1 of 44
The aggregate market value of shares of common stock held by non-affiliates
of the registrant was approximately $469,651 as of January 9, 2003, based upon
the closing price of the registrant's common stock on the Over The Counter
Bulletin Board on such date. Shares of common stock held by each executive
officer and director and by each person and entity who beneficially owns more
than 5% of the outstanding common stock have been excluded in that such person
or entity under certain circumstances may be deemed to be an affiliate. Such
exclusion should not be deemed a determination or admission by registrant that
such individuals or entities are, in fact, affiliates of registrant.
As of January 9, 2003, there were outstanding 7,691,503 shares of Common
Stock.
Documents incorporated by reference:
Portions of IEC Electronics Corp.'s Proxy Statement for the Annual Meeting
of Stockholders to be held on February 26, 2003 are incorporated into Part III
of this Form 10-K.
Explanatory Note
This Amendment No. 1 to the Form 10-K of IEC Electronics Corp. ("IEC",
"We", "Our") for the year ended September 30, 2002 which was originally filed on
January 14, 2003 ("Original 2002 10-K") is being filed (i) to delete the risk
factor entitled "Financing Arrangements" in Item 1 of Part I of the Original
2002 10-K, (ii) to correct and expand disclosure regarding IEC's refinancing
which occurred on January 14, 2003 and which is discussed in the Original 2002
10-K in Item 7 of Part II and in Footnote 7 of the Footnotes to IEC's
Consolidated Financial Statements, (iii) to correct certain numbers in the
Footnotes to the Consolidated Financial Statements and (iv) to make immaterial
editorial corrections to the Consolidated Financial Statements.
The Items of the Original 2002 10-K filing which are amended and restated
herein in their entirety are:
Item 1 of Part I
Item 7 of Part III
Item 15 of Part IV
Consolidated Financial Statements
All other information contained in the Original 2002 10-K filing remains
unchanged.
Page 2 of 44
TABLE OF CONTENTS
PART I
PAGE
Item 1: Business..................................................... 4
PART II
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 12
PART IV
Item 15: Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 18
Page 3 of 44
PART I
ITEM 1. BUSINESS
-----------------
IEC Electronics Corp. ("IEC", "We", "Our") is an independent electronics
manufacturing services ("EMS") provider of complex printed circuit board
assemblies and electronic products and systems. IEC is a significant provider of
high quality electronics manufacturing services with state-of-the-art
manufacturing capabilities and production capacity. Utilizing computer
controlled manufacturing and test machinery and equipment, We provide
manufacturing services employing surface mount technology ("SMT") and
pin-through-hole ("PTH") interconnection technologies. As an independent
full-service EMS provider, IEC offers its customers a wide range of
manufacturing and management services, on either a turnkey or consignment basis,
including design, prototype, material procurement and control, manufacturing and
test engineering support, statistical quality assurance, complete resource
management and distribution. Our strategy is to cultivate strong manufacturing
relationships with established and emerging original equipment manufacturers
("OEMs").
IEC Electronics Corp., a Delaware corporation, is the successor by merger
in 1990 to IEC Electronics Corp., a New York corporation which was organized in
1966. In June 1992, IEC acquired an EMS provider in Edinburg, Texas which it
renamed IEC Electronics-Edinburg, Texas Inc. ("Texas"). In November 1994, IEC
acquired an EMS provider in Arab, Alabama, which it renamed IEC Arab, Alabama
Inc. ("Alabama"). In August 1998, IEC through an Irish subsidiary, IEC
Electronics - Ireland Limited, ("Longford"), acquired certain assets of an EMS
provider located in Longford, Ireland. In February 2001, IEC acquired IEC
Electronicos de Mexico, located in Reynosa, Mexico ("Mexico").
In October 1998, IEC closed its Alabama facility. The facility's customers
were transferred to IEC's other facilities, the equipment was moved to IEC's
other locations, and certain portions of the real estate were leased until
October 2002, when the real estate was sold for the sum of $600,000.
In December 1998, IEC entered into a Shelter Services Agreement with a
Texas Limited Partnership and its Mexican corporate subsidiary which leased
50,000 square feet in a newly constructed industrial park in Reynosa, Mexico.
This Maquiladora facility thereafter commenced manufacturing printed circuit
board assemblies and wire harnesses, and began shipping in April 1999 as IEC
Electronicos de Mexico.
The consolidated financial statements include the accounts of IEC and its
wholly-owned subsidiaries, Texas and Alabama until January 26, 2000 when each of
Texas and Alabama merged into IEC; Longford from August 31, 1998, until
September 4, 2001, when it was merged into IEC; and Mexico from February 2001,
(collectively, "IEC"). In December 1999, IEC closed its under utilized Longford
operations and transferred some of the customers served there to its other
operations in New York and Texas. All significant intercompany transactions and
accounts have been eliminated.
Effective February 1, 2001, IEC terminated the Shelter Services Agreement
and exercised its option to acquire the Mexican subsidiary of the Texas Limited
Partnership for one U.S. dollar ($1.00). On March 28, 2001, the subsidiary,
wholly owned by IEC, executed a new five-year lease agreement with a five-year
renewal option combining the original 50,000 square feet with an additional
62,000 square feet at the Reynosa facility. Effective May 1, 2001, the Mexican
subsidiary, IEC Electronicos de Mexico, S. De R.L. De C.V. occupied the entire
112,000 square foot facility.
In April 2001, the Texas and Mexico business operations were consolidated.
On June 18, 2002, IEC signed an Asset Purchase Agreement to sell
substantially all of the assets of Mexico to Electronic Product Integration
Corporation (EPI) for $730,000 plus payments of an Earn-out Amount, based upon
sales revenues received by EPI from certain former customers of IEC during the
period between July 1, 2002 and January 31, 2003, in an amount up to $700,000.
As of September 30, 2002, no Earn-out amounts have been accrued or received. In
addition, EPI will pay to IEC commissions based on the net selling price of
products shipped to certain former customers of IEC during various time periods
between June 18, 2002 and March 31, 2003. No such commissions have been earned
as of September 30, 2002. Under the terms of a related agreement, IEC and Mexico
were also released of all of their lease obligations to the landlord of the
Mexican facility. EPI paid IEC $315,000 in June 2002, $265,000 in July 2002 and
$150,000 in September 2002. IEC recorded an after-tax loss on the sale of the
business of approximately $3.1 million. The reserve balance at September 30,
2002 was $421,000. It is anticipated that all remaining charges against the
accrual will be made by September 2003. The Consolidated Financial Statements
and related notes have been restated, where applicable, to reflect Mexico as a
discontinued operation.
Page 4 of 44
In June 2002, IEC's Board of Directors approved a restructuring and
reduction of workforce plan at its Newark, NY facility. At this time, IEC's
President, Chief Executive Officer and a director of the Company and its Chief
Financial officer and Treasurer also resigned their positions with IEC. Each
elected not to continue in the management of a restructured and downsized
company.
In connection with this restructuring, IEC recorded a $448,000 charge to
earnings during fiscal 2002 relating primarily to severance. As of September 30,
2002, a reserve balance of approximately $215,000 still remained. It is
anticipated that all remaining charges against the accrual will be made by
October 2003.
In July 2002, IEC closed its manufacturing operations in Texas and the
facility has been listed for sale since that time.
IEC has achieved world-class ISO 9001 certification at its Newark, New York
plant. In fiscal 2002, IEC also became an FDA registered contract manufacturer
of medical devices. These certifications are international quality assurance
standards that most OEMs consider crucial in qualifying their EMS providers.
IEC's New York facility is self-certified to previously recognized British
Approvals Board for Telecommunications standards, allowing it to provide
manufacturing and test services to manufacturers producing telecommunication
equipment destined for shipment to the European Common Market.
During 1998, IEC opened a state-of-the-art 10,000 square foot Technology
Center at its Newark, New York manufacturing facility. During 2000, the
Technology Center added pilot build to its services, which also include
prototype assembly and the Advanced Materials Technology Laboratory. Design
Engineering services are also provided at the Newark, New York facility.
IEC's executive offices are located at 105 Norton Street, Newark, New York
14513. The telephone number is (315) 331-7742, its internet address is
www.iec-electronics.com.
Electronics Manufacturing Services: The Industry
The EMS industry specializes in providing the program management, technical
and administrative support and manufacturing expertise required to take a
product from the early design and prototype stages through volume production and
distribution. It provides quality product, delivered on time and at the lowest
cost, to the OEM. This full range of services gives the OEM an opportunity to
avoid large capital investments in plant, equipment and staff and allows the OEM
to concentrate instead on the areas of its greatest strengths: innovation,
design and marketing. Utilizing EMS such as those provided by IEC gives the
customer an opportunity to improve return on investment with greater flexibility
in responding to market demands and exploiting new market opportunities.
Primarily as a response to rapid technological change and increased
competition in the electronics industry, OEMs have recognized that by utilizing
EMS providers they can improve their competitive position, realize an improved
return on investment and concentrate on areas of their greatest expertise such
as research, product design and development and marketing. In addition, EMS
allows OEMs to bring new products to market rapidly and adjust more quickly to
fluctuations in product demand; avoid additional investment in plant, equipment
and personnel; reduce inventory and other overhead costs; and establish known
unit costs over the life of a contract. Many OEMs now consider EMS providers an
integral part of their business and manufacturing strategy. Accordingly, the EMS
industry experienced significant growth through mid-2000. The downturn of the
telecommunications industry, and economic conditions in the United States as a
result of September 11, 2001 caused a slowdown in the EMS industry, but the
current long term forecast is for growth to resume in late 2003, as OEMs have
established long-term working arrangements with EMS providers such as IEC.
Page 5 of 44
OEMs increasingly require EMS providers to provide complete turnkey
manufacturing and material handling services, rather than working on a
consignment basis in which the OEM supplies all materials and the EMS provider
supplies labor. Turnkey contracts involve design, manufacturing and engineering
support, the procurement of all materials, and sophisticated in-circuit and
functional testing and distribution.
In the industry there has been the increasing shift from PTH to SMT
interconnection technologies. PTH technology involves the attachment of
electronic components to printed circuit boards with leads or pins which are
inserted into pre-drilled holes in the boards. The pins are then soldered to the
electronic circuits. The drive for increasingly greater functional density has
resulted in the emergence of SMT, which eliminates the need for holes and allows
components to be placed on both sides of a printed circuit, contributing to size
reductions of up to 50%. SMT requires expensive, highly automated assembly
equipment and significantly more expertise than PTH technology. To achieve high
yields, EMS providers must have extensive knowledge and experience in solder
paste, solder reflow, thermal management, metal fatigue, adhesives, solvents,
flux chemistry, surface analysis, intermetallic bonding and testing. The shift
to SMT from PTH technology has increased the use of EMS providers by OEMs
seeking to avoid the significant capital investment required for development and
maintenance of SMT expertise.
IEC continually evaluates emerging technology and maintains a technology
road map to ensure relevant processes are available to its customers when
commercial and design factors so indicate. The current generation of
interconnection technologies include chip scale packaging and ball grid array
(BGA) assembly techniques. IEC has placed millions of plastic BGA's since 1994
and added Ceramic BGA placement for networking customers to its service
offerings in fiscal 2001. Future advances will be directed by IEC's Technology
Center which combines Prototype and Pilot Build Services with the capabilities
of the Advanced Materials Technology Laboratory, and is supported by the Design
Engineering Group.
IEC is well positioned to utilize its very experienced workforce with
technical expertise. Our emphasis is on building the most challenging complete
systems with current work for Motorola, Lucent OPENet and Teradyne as examples.
IEC's Strategy
IEC's strategy is to cultivate strong manufacturing partnerships with
established and emerging OEMs in the electronics industry. These long-term
business partnerships involve the joint development of manufacturing and support
strategies with OEM customers and promote customer satisfaction. In implementing
this strategy, we offer our customers a full range of manufacturing solutions
through flexibility in production, high quality and fast-turnaround
manufacturing services and computer-aided testing.
As part of our strategy, we recognize the need to offer advanced
manufacturing technologies to our customers. We have also successfully pursued
high-mix, small lot and complete system assemblies which are difficult and
require very close management.
Assembly Process
IEC generally enters into formal agreements with its significant customers.
These agreements generally provide for fixed prices for one year, absent any
customer changes which impact cost of labor or material, and rolling forecasts
of customer requirements. After establishing an OEM relationship, IEC offers its
consultation services with respect to the manufacturability and testability of
the product design. IEC often recommends design changes to reduce manufacturing
costs and to improve the quality of the finished assemblies, and in some
instances will produce original designs to the customer's specifications.
Upon receipt, a customer's order is entered into IEC's computer system by
customer service personnel and is reviewed by all departments. The Production
Control Department generates a detailed manufacturing schedule. Bills of
material and approved vendor lists are reviewed by the Engineering Department,
which creates a detailed process to direct the flow of product through the
plant. The Material Control Department utilizes a material requirement planning
(MRP) program to generate the requisitions used by the Purchasing Department to
procure all material and components from approved vendors in the quantities and
at the time required by the production schedule.
Page 6 of 44
All incoming material is inspected to ensure compliance with customer
specifications and delivered to the production floor on a "just-in-time" basis.
Material and product movement are carefully and continuously computer-monitored
throughout the assembly process to meet customer requirements. The placement and
insertion of components on circuit board assemblies are accomplished by
high-speed, vision and computer-controlled PTH or SMT machines. Any manual
operations are performed prior to passage of the assemblies through various
soldering processes. Statistical process control ("SPC") is used to provide
consistent results in all steps of the manufacturing process.
The manufactured assembly then moves into the test phase. IEC's
computer-aided testing ensures delivery of high quality products on a consistent
basis. Computer-driven in-circuit tests verify that all components have been
properly placed or inserted and that the electrical circuits are complete.
Functional tests determine if the board or system assembly is performing to
customer specifications.
IEC assigns a program manager to each customer. The program manager
maintains regular contact with the customer to assure timely and complete flow
of information between the customer and IEC. Many products manufactured by IEC
are in the early stages of their product cycle and therefore undergo numerous
engineering changes. In addition, production quantities and schedules of certain
products must be varied to respond to changes in customers' marketing
opportunities. We assess the impact of such changes on the production process
and take the appropriate action, such as restructuring bills of material,
expediting procurement of new components and adjusting its manufacturing and
testing plans. IEC believes that its ability to provide flexible and rapid
response to customer needs in high change environment is critical to its
success.
Products and Services
IEC manufactures a wide range of assemblies which are incorporated into
many different products. IEC provides electronic manufacturing services
primarily for broadband telecommunications equipment; measuring devices; medical
instrumentation; imaging equipment and diagnostic test equipment. During the
fiscal year ended September 30, 2002 IEC provided electronics manufacturing
services to approximately 25 different customers, including Motorola
("Motorola"), Teradyne Diagnostic Solutions UK ("Teradyne Diagnostic"), Teradyne
Test Division ("Teradyne Test"), and General Electric Transportation ("GE"). IEC
provides its services to multiple divisions and product lines of many of its
customers and typically manufactures for a number of each customer's successive
product generations. In most cases, IEC is the sole contract manufacturer for
the customer site or division, providing all services, prototype through box
build and functional test.
Materials Management
In fiscal 2002, 2001, and 2000, turnkey contracts, under which IEC provided
materials in addition to a value-added labor component, represented 92 percent,
96 percent and 96 percent of sales, respectively. Materials and the associated
material handling expense often represent a very substantial portion of the
total manufacturing cost of turnkey products. IEC generally procures material
only to meet specific contract requirements. In addition, IEC's agreements with
its significant customers generally provide for cancellation charges equal to
the costs which are incurred by IEC as a result of a customer's cancellation of
contracted quantities. IEC's internal systems provide effective controls for all
materials, whether purchased by IEC or provided by the customer, through all
stages of the manufacturing process, from receiving to final shipment.
Materials and components used in EMS, whether supplied by the OEM or by
IEC, are available generally from a number of suppliers at negotiated prices
which are firm for the life of the purchase order. However, at various times in
the electronics industry there have been industry-wide shortages of components
which have temporarily delayed IEC's manufacture and shipment of products. Our
business is not dependent upon any one supplier.
Suppliers
We have Master Distribution Programs in place with Arrow Electronics and
Pioneer-Standard Electronics. These alliances have the benefit of reducing lead
time on program parts, reducing the quotation process timetable, providing
competitive pricing, providing some protection during periods of component
allocation, providing better payment terms, reducing overhead cost and providing
access to global resources.
Page 7 of 44
Marketing and Sales
For most of 2002, IEC has successfully maintained and grown sales through
increases in services to existing customers. However, the real and perceived
financial threats to IEC have precluded the efforts to engage with new
customers. With the attainment of a new credit facility, we expect to pursue new
business through the efforts of our long term exclusive relationship with a
manufacturers' representative in New England and through the careful selection
of new representatives in the Mid-Atlantic and Mid-Western regions. In addition
to our sales and marketing staff, our executives are closely involved with
marketing efforts. IEC conducts market research to identify industries and to
target companies where the opportunity exists to provide electronic
manufacturing services across a number of product lines and product generations.
Our sales effort is supported by advertising in trade media, sales
literature, internet website, video presentations, participation in trade shows
and direct mail promotions. Inquiries resulting from these advertising and
public relations activities are assigned to the representative covering the
customer's location. In addition, referrals by existing customers are an
important source of new opportunities. Our objective is to sell complex,
high-mix, full systems to regional customers who require both our technical
expertise and our ability to execute in a dynamic engineering change
environment. These customers can be found in many diverse industries including
telecom, medical, transportation, defense, avionics and others.
Backlog
IEC's backlog as of September 30, 2002 and September 30, 2001 was
approximately $8.5 million and $11.6 million, respectively. At December 31,
2002, the backlog was $17.5 million, and the book-to-bill ratio (newly signed
purchase orders/sales) for the first quarter of fiscal 2003 improved to 1.96
from 1.55 for the fourth quarter of fiscal 2002. Backlog consists of contracts
or purchase orders with delivery dates scheduled within the next 12 months.
Substantially all of the current backlog is expected to be shipped within IEC's
current fiscal year. Variations in the magnitude and duration of contracts
received by us and customer delivery requirements may result in substantial
fluctuations in backlog from period to period. Because customers may cancel or
reschedule deliveries, backlog is not a meaningful indicator of future financial
results.
Governmental Regulation
Our operations are subject to certain federal, state and local regulatory
requirements relating to environmental, waste management, health and safety
matters. Management believes that our business is operated in compliance with
applicable regulations promulgated by the Occupational Safety and Health
Administration and the Environmental Protection Agency and corresponding state
agencies which, respectively, pertain to health and safety in the work place and
the use, discharge, and storage of chemicals employed in the manufacturing
process. Current costs of compliance are not material to IEC. However, new or
modified requirements, not presently anticipated, could be adopted creating
additional expense for us.
Employees
IEC's employees numbered approximately 190 at January 8, 2003, including 33
employees engaged in engineering, 109 in manufacturing and 48 in administrative
and marketing functions. None of IEC's employees are covered by a collective
bargaining agreement. We have not experienced any work stoppages and believe
that our employee relations are good. We have access to a large work force by
virtue of our northeast location midway between Rochester and Syracuse, two
upstate New York industrial cities.
Patents and Trademarks
IEC holds patents unrelated to electronics manufacturing services and also
employs various registered trademarks. IEC does not believe that either patent
or trademark protection is material to the operation of its business.
Safe Harbor for Forward-looking Statements under Securities Litigation
Reform Act of 1995: Certain risk factors
Page 8 of 44
From time to time, IEC or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by IEC with the Securities and Exchange Commission. The
words or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the Reform Act). IEC wishes to ensure
that such statements are accompanied by meaningful cautionary statements, so as
to maximize to the fullest extent possible the protections of the Safe Harbor
established in the Reform Act. Accordingly, such statements are qualified in
their entirety by reference to and are accompanied by the following discussion
of certain important factors that could cause actual results to differ
materially from such forward looking statements.
Stockholders should be aware that while IEC does, from time to time,
communicate with securities analysts, it is against our policy to disclose to
such analysts any material non-public information or other confidential
information. Accordingly, stockholders should not assume that we agree with any
statement or report issued by any analyst regardless of the content of such
statement or report. Accordingly, to the extent that reports issued by a
securities analyst contain any projections, forecasts, or opinions, such reports
are not the responsibility of IEC.
The risks included here are not exhaustive. Furthermore, reference is also
made to other sections of this report which include additional factors which
could adversely impact IEC's business and financial performance. Moreover, we
operate in a very competitive and rapidly changing environment. New risk factors
emerge from time to time and it is not possible for management to predict all of
such risk factors, nor can it assess the impact of all such risk factors on
IEC's business or the extent to which any factor, or a combination of factors
may cause actual results to differ materially from those contained in any
forward-looking statements. Accordingly, forward-looking statements should not
be relied upon as a prediction of actual results.
General Economic Conditions
IEC is exposed to general economic conditions which could have a material
adverse impact on its business, operating results and financial condition. As a
result of continued unfavorable economic conditions, sales have declined in
fiscal 2002 compared to fiscal 2001. In particular, sales to OEMs in the
telecommunications, workstation and server equipment manufacturing industry
worldwide were impacted during fiscal 2002. If the economic conditions in the
United States worsen either as the result of a protracted recession, in
consequence of the after effects of the events of September 11, 2001 or as the
result of a pending war, IEC may experience a material adverse impact on its
business, operating results and financial condition.
Page 9 of 44
Customer Concentration; Dependence On the Electronics Industry
A small number of customers are currently responsible for a significant
portion of our net sales. During fiscal 2002, 2001, and 2000, IEC's five largest
customers accounted for 81%, 72% and 81% of consolidated net sales,
respectively. During fiscal 2002, Motorola and Teradyne accounted for 44% and
23%, respectively, of consolidated net sales. IEC is dependent upon continued
revenues from its other large customers. The percentage of IEC's sales to its
major customers may fluctuate from period to period. Significant reductions in
sales to any of these customers could have a material adverse effect on our
results of operations. IEC has no firm long-term volume purchase commitments
from our customers, and over the past few years has experienced reduced
lead-times in customer orders. In addition, customer contracts can be canceled
and volume levels can be changed or delayed. The timely replacement of canceled,
delayed or reduced contracts with new business cannot be assured. These risks
are increased because a majority of IEC's sales are to customers in the
electronics industry, which is subject to rapid technological change and product
obsolescence. The factors affecting the electronics industry, in general, or any
of our major customers in particular, could have a material adverse effect on
IEC's results of operations.
Revenue Fluctuations
IEC's revenues have fluctuated over the past five fiscal years. Net sales
were $163.9 million in fiscal 1998, $122.6 million in fiscal 1999, $146.4
million in fiscal 2000, $114.8 million in fiscal 2001, and $39.4 million in
fiscal 2002. Although IEC is seeking to broaden its portfolio of customers there
can be no assurance that its revenues will increase. Should we increase our
expenditures in anticipation of a future level of sales which does not
materialize, our profitability would be adversely affected. On occasion,
customers may require increased volume or rapid increases in production which
can place an excessive burden on our resources.
Page 10 of 44
Potential Fluctuations in Operating Results
IEC's margins and operating results are affected by a number of factors,
including product mix, additional costs associated with new projects, price
erosion within the electronics industry, capacity utilization, price
competition, the degree of automation that can be used in the assembly process,
the efficiencies that can be achieved by us in managing inventories and fixed
assets, the timing of orders from major customers, fluctuations in demand for
customer products, the timing of expenditures in anticipation of increased
sales, customer product delivery requirements, and increased costs and shortages
of components or labor. IEC's results are also affected by its costs and fees
associated with its financing. IEC's turnkey manufacturing, which typically
results in higher net sales and gross profits but lower gross profit margins
than consignment assembly and testing services, represents a substantial
percentage of net sales. All of these factors can cause fluctuations in our
operating results over time. Because of these factors, there can be no assurance
that our margins or results of operations will not fluctuate or decrease in the
future.
Competition
As a result of IEC's new focus on a target market consisting of complex,
high-mix, high unit price, full systems build, we believe that IEC is
competitive with contract electronics manufacturers ("CEMs") of our size in our
region. There is a reluctance for customers with $1 million to $5 million annual
purchases to engage with very large CEMs.
Availability of Components
Substantially all of IEC's net sales are derived from turnkey manufacturing
in which we provide both materials procurement and assembly services. IEC is
well positioned with supplier relationships and material procurement expertise
to acquire needed materials. However, availability of customer-consigned parts
and unforeseen shortages of components on the world market are beyond our
control and could adversely affect revenue levels and operating efficiencies.
Market Price of Common Stock
The fluctuations in IEC's operating results as well as general market
conditions have affected the price of our Common Stock. On January 9, 2003, the
closing price of the Company's Common Stock on The Over the Counter Bulletin
Board ("OTCBB") was $0.09 per share.
Environmental Compliance
IEC is subject to a variety of environmental regulations relating to the
use, storage, discharge and disposal of hazardous chemicals used during its
manufacturing process. Any failure by IEC to comply with present or future
regulations could subject it to future liabilities or the suspension of
production which could have a material adverse effect on our business. In
addition, such regulations could restrict IEC's ability to expand its facilities
or could require us to acquire costly equipment or to incur other expenses to
comply with environmental regulations.
Dependence on Key Personnel and Skilled Employees
IEC's results depend to a large extent upon the efforts and abilities of
key managerial and technical employees. The loss of services of certain key
personnel could have a material adverse effect on IEC. IEC's business also
depends upon its ability to continue to attract and retain senior managers and
skilled employees. Failure to do so could adversely affect our operations.
Page 11 of 44
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
--------------------------
MANAGEMENT'S DISCUSSION OF OPERATIONS
The information in this Management's Discussion & Analysis should be read
in conjunction with the accompanying consolidated financial statements, the
related Notes to Financial Statements and the Five-Year Summary of Financial
Data. Forward-looking statements in this Management's Discussion and Analysis
are qualified by the cautionary statement in Item 1 of this Form 10K.
Overview
--------
IEC had a challenging year in fiscal 2002 as it continued its downsizing
and restructuring in an effort to return to profitability with a continuing
focus on telecommunications and industrial customers. During 2002, these
segments of the economy contracted dramatically and IEC suffered significant
order reductions from its customers. IEC was also adversely impacted by our
limited ability to finance growth. IEC took a number of important steps in 2002,
including a continued emphasis on business development from new and existing
customers and completing a restructuring which resulted in the elimination of
its Texas and Mexico business operations, while significantly reducing its
overhead structure to match lower revenues.
Analysis of Operations
----------------------
Sales
-----
(dollars in millions)
% %
For Year Ended September 30, 2002 2001 Change 2000 Change
---- ---- ------ ---- ------
Net sales $39.4 $114.8 (66)% $146.4 (22)%
The 66% decrease in fiscal 2002 net sales compared to fiscal 2001 was
primarily due to the continued decline in demand from existing customers, the
loss of four major customers and the overall economic slowdown in the
electronics manufacturing services industry.
The 22% decrease in fiscal 2001 net sales compared to fiscal year 2000 was
primarily due to the loss of one major customer and the significant downturn in
the telecommunications and industrial sectors of the U.S. economy.
Subsequent to September 30, 2002, the book-to-bill ratio has improved and
was at 1.96 for the first quarter of fiscal 2003, compared to 1.55 for the
fourth quarter of fiscal 2002. IEC's percentage of turnkey sales has remained
steady. Such sales represented 92% ,96% and 96% of net sales in fiscal 2002,
2001 and 2000, respectively.
Gross Profit and Selling and Administrative Expenses
----------------------------------------------------
(as a % of Net Sales)
For Year Ended September 30, 2002 2001 2000
---- ---- ----
Gross profit 5.8% 2.6% 7.1%
Selling and administrative expenses 10.7% 6.1% 6.4%
Gross profit as a percentage of sales was 5.8% in fiscal 2002 as compared
to 2.6% in fiscal 2001. The increase of more than 3 percentage points was
primarily attributable to the sale of fully reserved inventory to Acterna
Corporation for $1.1 million as part of an out of court settlement. In addition,
the 2001 amount was considerably lower due to the charge against inventory and
receivables as described below. Offsetting this increase was a reduction due to
fixed manufacturing overhead costs being absorbed by a significantly lower sales
volume.
Gross profit as a percentage of sales was 2.6% in fiscal 2001 as compared
to 7.1% in fiscal 2000. This decrease was a result of a combination of factors.
IEC experienced lower overhead absorption due to underutilized capacity from
lower sales volume, change of customer mix, and greater customer product
complexity with requests for design changes which caused manufacturing
production interruptions, restarts and increased set-up expenses, creating
excess production downtime. A significant factor was a charge against inventory
and receivables recorded on January 11, 2002, included in the financial
statements as of September 30, 2001, to reflect litigation contingencies. Were
it not for that charge, the fiscal 2001 gross profit percentage would have been
5.0%. During fiscal 2001, IEC significantly reduced its overhead structure in an
effort to match lower revenues. On an annualized basis, $8.0 million was
removed. As a result, the breakeven level of business was almost half of the
level in effect in fiscal 2000.
Page 12 of 44
Selling and administrative expenses as a percentage of sales increased to
10.7% in fiscal 2002 compared to 6.1% in fiscal 2001 as certain costs remained
fixed with a significantly lower sales volume.
Selling and administrative expenses as a percentage of sales in fiscal 2001
decreased slightly to 6.1% compared to 6.4% in fiscal 2000. This minimal change
during a year when revenue decreased 22% was primarily a result of concentrated
efforts to better match overhead expenses with the revenue stream.
Other Income and Expense
------------------------
(dollars in millions)
For Year Ended September 30, 2002 2001 2000
---- ---- ----
Interest and financing expense $0.9 $1.3 $1.6
Other income $0.2 $ - $2.0
Interest and financing expense decreased $0.4 million to $0.9 million in
fiscal 2002 from $1.3 million in fiscal 2001, due to a decrease in the weighted
average debt balance of $7.6 million and a weighted average rate decrease of
2.8%, offset by additional bank financing charges of approximately $580,000.
Interest and financing expense decreased $0.3 to $1.3 million in fiscal
2001 from $1.6 million in fiscal 2000 due to lower interest rates throughout the
year.
Other income of $0.2 million in fiscal 2002 is composed of interest income
received from Acterna Corporation as part of an out of court settlement.
Other income of $2.0 million in fiscal 2000 is composed of life insurance
proceeds due to the death of the former Chief Executive Officer in December
1999.
Income Taxes
------------
(as a % of loss before income taxes)
For Year Ended September 30, 2002 2001 2000
---- ---- ----
Effective tax rate -% (0.1)% -%
In fiscal 2001, IEC recorded an income tax benefit from the receipt of a
prior year state refund in the amount of $95,000. IEC has recorded no benefit
from U.S. income tax for fiscal years 2002, 2001 and 2000 as a result of net
losses from fiscal 1998 through 2002, and accordingly, has a full valuation
allowance against its net deferred tax asset including the net operating loss
carry-forward.
Restructuring Charge (Benefit)
-----------------------------
(dollars in millions)
For Year Ended September 30, 2002 2001 2000
---- ---- ----
$0.2 $ - $(1.0)
In June 2002, IEC's Board of Directors approved a restructuring and
reduction of workforce plan at its Newark, NY facility. At this time, IEC's
President, Chief Executive Officer and a director of IEC and its Chief
Financial officer and Treasurer also resigned their positions with IEC. Each
elected not to continue in the management of a restructured and downsized
company. In connection with this restructuring, IEC recorded a $448,000 charge
to earnings in fiscal 2002 relating primarily to severance. Offsetting this
charge was a $240,000 reduction in a reserve previously recorded for IEC's Arab,
Alabama facility that was no longer needed due to the sale of the facility in
October 2002.
In fiscal 2000, $1.0 million of a previously recorded restructuring reserve
related to the Longford facility was reversed when certain assets of the
Longford facility were sold and the lease of the facility was assumed.
Page 13 of 44
Asset Impairment Writedown
--------------------------
In assessing and measuring the impairment of long-lived assets, IEC applies
the provisions of Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the long-lived asset or identifiable intangible
being tested for impairment was acquired in a purchase business combination, the
goodwill that arose in that transaction is included in the asset grouping in
determining whether an impairment has occurred. If some but not all of the
assets acquired in that transaction are being tested, goodwill is allocated to
the assets being tested for impairment based on the relative fair values of the
long-lived assets and identifiable intangibles acquired at the acquisition date.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Additionally, where an impairment loss is recognized
for long-lived assets and identifiable intangibles where goodwill has been
allocated to the asset grouping, as described immediately above, the carrying
amount of the allocated goodwill is impaired (eliminated) before reducing the
carrying amounts of impaired long-lived assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
With respect to the carrying amounts of goodwill remaining after the
testing for impairment of long-lived assets and identifiable intangibles,
including enterprise level goodwill not subject to impairment testing under SFAS
No. 121, IEC assesses such carrying value for impairment whenever events or
changes in circumstances indicate that the carrying amount of such goodwill may
not be recoverable. IEC assesses the recoverability of this goodwill by
determining whether the amortization of goodwill over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
business. The amount of goodwill impairment, if any, is measured based on
projected discounted operating cash flows compared to the carrying value of such
goodwill.
During the fourth quarter of 2001, certain fixed assets and intangible
assets were identified as impaired. As a result of the overall softening of the
electronics manufacturing services industry and a change in IEC's business
strategy, IEC did not believe that their future cash flows supported the
carrying value of the long-lived assets and goodwill. The current market values
were compared to the net book value of the related long-lived assets with the
difference representing the amount of the impairment loss. The effect of this
impairment recognition totaled approximately $12.6 million, of which $9.6
million represented a writeoff of goodwill and $3.0 million represented a
writedown of property, plant and equipment.
During August 1998, IEC initiated a plan to dispose of its Arab, Alabama
facility. In conjunction with this decision, the asset was written down to its
estimated recoverable sales value, net of commissions. The effect of this
impairment recognition totaled approximately $900,000 for fiscal 2002. The
facility is recorded at its carrying value of $497,000 at September 30, 2002.
The facility was sold in October 2002 for $600,000.
During April 2001, IEC initiated a plan to dispose of its Edinburg, Texas
facility. In conjunction with this decision, the asset was written down to its
estimated recoverable sales value, net of commissions. The effect of this
impairment recognition totaled approximately $1.04 million for fiscal 2002 and
was reflected in discontinued operations. The facility is recorded at its
carrying value of $800,000 at September 30, 2002.
Discontinued Operations
-----------------------
On June 18, 2002, IEC signed an Asset Purchase Agreement to sell
substantially all of the assets of Mexico to Electronic Product Integration
Corporation (EPI) for $730,000 plus payments of an Earn-out Amount, based upon
sales revenues received by EPI from certain former customers of IEC during the
period between July 1, 2002 and January 31, 2003, in an amount up to $700,000.
As of September 30, 2002, no Earn-out amounts have been accrued or received. In
addition, EPI will pay to IEC commissions based on the net selling price of
products shipped to certain former customers of IEC during various time periods
between June 18, 2002 and March 31, 2003. No such commissions have been earned
as of September 30, 2002. Under the terms of a related agreement, IEC and Mexico
were also released of all of their lease obligations to the landlord of the
Mexican facility. EPI paid IEC $315,000 in June 2002, $265,000 in July 2002 and
$150,000 in September 2002. During the third quarter of 2002, IEC recorded an
after-tax loss on the sale of the business of approximately $4.5 million. During
the fourth quarter of 2002, IEC reversed $1.3 million of this loss due to the
refining of estimates as the disposal process continued to be completed. The
after-tax loss on the sale of the business for 2002 was approximately $3.1
million. The reserve balance at September 30, 2002 was $421,000. It is
anticipated that all remaining charges against the accrual will be made by
September 2003. The Consolidated Financial Statements and related notes have
been restated, where applicable, to reflect Mexico as a discontinued operation.
Page 14 of 44
Liquidity and Capital Resources
-------------------------------
As reflected in the Consolidated Statement of Cash Flows for 2002, $8.1
million of cash was provided by operating activities, $0.5 million was provided
by investing activities and was mainly related to the sale of Mexico and $1.0
million was provided by discontinued operations. $9.5 million of this cash was
used to pay down debt. During fiscal year 2002, total debt, including drafts
payable, was reduced from $14.2 million to $4.0 million.
As reflected in the Consolidated Statement of Cash Flows for 2001, of the
$17.2 million of cash provided by operating activities, $3.2 million was used to
fund investing activities, and $4.6 million was used to pay down bank debt, and
$9.4 million was used in discontinued operations.
Capital additions were $3.1 million in 2001 and $1.2 million in 2000. These
expenditures were primarily used to upgrade the manufacturing capabilities of
IEC.
As of September 30, 2001, IEC was not in compliance with certain financial
covenants under its secured asset-based credit agreement. As of December 21,
2001, IEC's banks waived the non-compliance, amended certain covenants to allow
IEC more flexibility and changed the expiration date of the credit agreement to
February 15, 2002 from January 31, 2003. Subsequent amendments were made to the
credit agreement as of February 15, 2002, February 28, 2002, March 15, 2002,
April 8, 2002, June 20, 2002, October 1, 2002, November 12, 2002 and January 1,
2003 which, among other things, continued to extend the expiration date of the
credit agreement. As a result of the January 1, 2003 amendment, the expiration
date of the credit agreement was January 17, 2003.
As last amended, the credit agreement provided for a revolving credit
facility component of $1.0 million. Amounts borrowed were limited to 85% of
qualified accounts receivable. The interest rate on the revolving credit
facility was increased at the time of the various amendments and on September
30, 2002 was prime rate plus 3.50%. On January 14, 2003 it was prime rate plus
6.00%.
The second component of the credit facility consisted of a $10 million
three-year term loan with monthly principal installments based on a five-year
amortization which began in April 2000. The interest rate on the term loan
facility was increased at the time of the various amendments and at September
30, 2002 was prime rate plus 4.00%. On January 14, 2003 it was prime rate plus
6.00%.
At September 30, 2002, $3.6 million was outstanding, consisting of $1.1
million and $2.5 million relating to the revolving credit facility and term
loan, respectively, with an additional $403,000 available under the revolving
credit facility. At January 6, 2003, the availability under the revolver was $0,
and $611,000 was outstanding on the revolver and $1.1 million was outstanding on
the term loan.
On January 14, 2003, IEC completed a new $7,300,000 financing composed of a
$5,000,000 Senior Secured Facility with Keltic Financial Partners LLP
("Keltic"), a $2,200,000 Secured Term Loan with SunTrust Bank ("SunTrust") and a
$100,000 infusion by certain of the IEC directors. The Keltic Facility, which
has a 3 year maturity, bears interest at the rate of prime plus 2%. It involves
a revolving line of credit for up to $3,850,000 based upon advances on eligible
accounts receivable and inventory, a term loan of $600,000, secured by machinery
and equipment, to be amortized over a 36 month period and a term loan of
$550,000 secured by a first mortgage lien against IEC's Edinburg, Texas real
estate which loan is due at the earlier of the sale of that real estate or one
year from the date of closing. The SunTrust Term Loan is secured by a general
security agreement, and indirectly by the assignment of a certain promissory
note and a first mortgage on the IEC plant in Newark, New York. It is payable
with interest at prime plus 1.5% in monthly installments over a period of 3
years. Of the funds provided by the new financing, $1,540,016 was used to repay
all but $100,000 of indebtedness to IEC's prior lenders, HSBC USA as agent for
itself and GE Capital Corporation, who will retain a subordinated interest in
substantially all of IEC's assets until the Texas real estate is sold. On
January 14, 2003, following the completion of the financing, the availability
under the revolver was $1,200,000.
The Keltic and Suntrust loan agreements contain various affirmative and
negative covenants including, among others, limitations on the amount available
under the revolving line of credit relative to the borrowing base, capital
expenditures, fixed charge coverage ratios, and minimum earnings before
interest, taxes, depreciation and amortization (EBITDA). In connection with the
financing, IEC entered into agreements with certain of its trade creditors
providing for extended payment terms involving an aggregate of approximately
$2,000,000 of past due balances.
Page 15 of 44
Application of Critical Accounting Policies
-------------------------------------------
IEC's financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. Critical accounting policies for IEC include
revenue recognition, impairment of marketing rights, accounting for legal
contingencies and accounting for income taxes.
IEC recognizes revenue in accordance with Staff Accounting Bulletin No.101,
"Revenue Recognition in Financial Statements." Sales are recorded when products
are shipped to customers. Provisions for discounts and rebates to customers,
estimated returns and allowances and other adjustments are provided for in the
same period the related sales are recorded.
IEC evaluates its long-lived assets for financial impairment on a regular
basis in accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." IEC evaluates the recoverability of long-lived assets not held
for sale by measuring the carrying amount of the assets against the estimated
discounted future cash flows associated with them. At the time such evaluations
indicate that the future discounted cash flows of certain long-lived assets are
not sufficient to recover the carrying value of such assets, the assets are
adjusted to their fair values.
IEC is subject to various legal proceedings and claims, the outcomes of
which are subject to significant uncertainty. Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies", requires that an estimated loss
from a loss contingency should be accrued by a charge to income if it is
probable that an asset has been impaired or a liability has been incurred and
the amount of the loss can be reasonably estimated. Disclosure of a contingency
is required if there is at least a reasonable possibility that a loss has been
incurred. IEC evaluates, among other factors, the degree of probability of an
unfavorable outcome and the ability to make a reasonable estimate of the amount
of loss. Changes in these factors could materially impact IEC's financial
position or its results of operations.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," establishes financial accounting and reporting standards for the effect
of income taxes. The objectives of accounting for income taxes are to recognize
the amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entity's financial statements or tax returns. Judgment is
required in assessing the future tax consequences of events that have been
recognized in IEC's financial statements or tax returns. Fluctuations in the
actual outcome of these future tax consequences could materially impact IEC's
financial position or its results of operations.
Impact of Inflation
-------------------
The impact of inflation on IEC's operations for the last three years has
been minimal due to the fact that it is able to adjust its bids to reflect any
inflationary increases in cost.
New Pronouncements
------------------
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("FAS 142"), "Goodwill and Other
Intangible Assets." FAS No. 142 requires that ratable amortization of goodwill
be replaced with periodic tests of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. The provisions
of FAS No. 142 will be effective for fiscal years beginning after December 15,
2001; however, as IEC wrote-off all goodwill during fiscal 2001, adoption of
this pronouncement will have no impact on IEC.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). We adopted this standard on October 1, 2002. Upon
adoption of SFAS No. 143, the fair value of a liability for an asset retirement
obligation will be recognized in the period in which it is incurred. The
associated retirement costs will be capitalized as part of the carrying amount
of the long-lived asset and subsequently allocated to expense over the asset's
useful life. Management does not expect the adoption of SFAS No. 143 to have a
material effect on the financial results of IEC.
Page 16 of 44
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS No. 144"). FAS No. 144 supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". FAS No. 144 applies to all long-lived
assets (including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business". FAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001, and was adopted by IEC, as required, on October 1, 2002. Management is
currently determining what effect, if any, FAS No. 144 will have on IEC's
financial position and results of operations.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4,
44,and 64, Amendment of FASB Statement No. 13, and technical Corrections (SFAS
No. 145). SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the
provisions of Opinion No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual and infrequent and
meet the criteria for classification as an extraordinary item. SFAS No. 145 is
effective for IEC beginning January 1, 2003. Management does not expect the
adoption of SFAS No. 145 to have a material effect on the financial results of
IEC.
In June 2002, the Financial Accounting Standards Board issued FASB
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" (SFAS 146). SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Costs covered by
SFAS 146 include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. SFAS 146 applies to all exit or disposal
activities initiated after December 31, 2002. Management does not anticipate
that the adoption of SFAS 146 will have any material impact on the financial
statement.
Page 17 of 44
In October 2002, the Financial Accounting Standards Board issued FASB
Statement No. 147, "Accounting for Acquisitions of Certain Financial
Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9" (SFAS 147). SFAS 147 amends SFAS 72 and no longer requires
companies to recognize, and subsequently amortize, any excess of the fair value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. In addition,
SFAS 147 amends SFAS 144 to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor and borrower
relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that SFAS 144 requires for other long-lived assets that are held and
used. Management does not anticipate that the adoption of SFAS 147 will have any
material impact on the financial statements.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------
(a) The following documents are filed as part of this report and as
response to Item 8:
Page
(1) and (2) Financial Statements and Supplementary Schedule
Report of Independent Public Accountants...................... 25
Consolidated Balance Sheets as of
September 30, 2002 and 2001.................................. 26
Consolidated Statements of Operations for the years
ended September 30, 2002, 2001 and 2000 .................... 27
Consolidated Statements of Comprehensive Income (Loss) and
Shareholders' Equity for the years ended September 30, 2002,
2001 and 2000................................................ 28
Consolidated Statements of Cash Flows for the years
ended September 30, 2002, 2001 and 2000...................... 29
Notes to Consolidated Financial Statements.................... 30
Selected Quarterly Financial Data (unaudited)................ 41
All other schedules are either inapplicable or the information is
included in the financial statements and, therefore, have been
omitted.
(3) Exhibits
Exhibit No. Title Page
3.1 Amended and Restated Certificate of Incorporation of DFT Holdings
Corp. (Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-56498)
3.2+ Amended Bylaws of IEC Electronics Corp.
3.3 Agreement and Plan of Merger of IEC Electronics into DFT Holdings
Corp. (Incorporated by reference to Exhibit 3.3 to the Company's
Registration Statement on Form S-1, Registration No. 33-56498)
3.4 Certificate of Merger of IEC Electronics Corp. into DFT Holdings
Corp. - New York. (Incorporated by reference to Exhibit 3.4 to
the Company's Registration Statement on Form S-1, Registration
No. 33-56498)
3.5 Certificate of Ownership and Merger merging IEC Electronics Corp.
into DFT Holdings Corp. - Delaware. (Incorporated by reference to
Exhibit 3.5 to the Company's Registration Statement on Form S-1,
Registration No. 33-56498)
3.6 Certificate of Merger of IEC Acquisition Corp. into IEC
Electronics Corp. (Incorporated by reference to Exhibit 3.6 to
the Company's Registration Statement on Form S-1, Registration
No. 33-56498)
Page 18 of 44
3.7 Certificate of Amendment of Certificate of Incorporation of IEC
Electronics Corp. filed with the Secretary of State of the State
of Delaware on Feb. 26, 1998 (Incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for
the Quarter ended March 27, 1998)
3.8 Certificate of Designations of the Series A Preferred Stock of
IEC Electronics Corp. filed with the Secretary of State of the
State of Delaware on June 3, 1998. (Incorporated by reference to
Exhibit 3.8 of the Company's Annual Report on Form 10-K for the year
ended September 30, 1998)
4.1 Specimen of Certificate for Common Stock. (Incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-1, Registration No. 33-56498)
4.2 Rights Agreement dated as of June 2, 1998 between IEC Electronics
Corp. and ChaseMellon Shareholder Services. LLC., as Rights
Agents (Incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated June 2, 1998)
10.1* Form of Indemnity Agreement. (Incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 2, 1993)
10.2* IEC Electronics Corp. 1993 Stock Option Plan, as amended
(Incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year ended September 30, 1998)
10.3* Form of Incentive Stock Option Agreement (Incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement
on Form S-8, Registration No. 33-79360)
10.4* Form of Non-Statutory Stock Option Agreement (Incorporated by
reference to Exhibit 4.3 to the Company's Registration Statement
on Form S-8, Registration No. 33-79360)
10.5* Form of Non-Employee Director Stock Option Agreement
(Incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-8, Registration No. 33-79360)
10.6*+ IEC Electronics Corp. 2001 Stock Option and Incentive Plan
10.7 2001 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 30, 2001).
10.8* IEC Electronics Corp. Savings and Security Plan effective June 1,
1997 (incorporated by reference to Exhibit 10.17 to the Company's
Annual Report on Form 10-K for the year ended September 30, 1997).
10.9* Amendment to IEC Electronics Corp. Savings and Security Plan
effective June 1, 1998. (Incorporated by reference to Exhibit 10.22
to the Company's Annual Report on Form 10-K for the year ended
September 30, 1998).
10.10* IEC Electronics Corp. Director Compensation Plan (incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on Form
10-K for the year ended September 30, 1998).
10.11 Loan and Security Agreement dated as of December 28, 1999, among IEC
ELECTRONICS CORP. and IEC ELECTRONICS-EDINBURG, TEXAS INC.
(collectively, "Debtor") and HSBC BANK USA as agent ("Agent") and
HSBC BANK USA ("HSBC Bank") and GENERAL ELECTRIC CAPITAL CORPORATION
("GE Capital"), as Lenders (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1999).
Page 19 of 44
10.12 Amendment No. 1 dated as of March 30, 2000 to Loan and Security
Agreement originally dated as of December 28, 1999 amount IEC
ELECTRONICS CORP. ("IEC) and IEC ELECTRONICS-EDINBURG, TEXAS INC.
("IEC-Edinburg") (collectively, "Debtor") and HSBC BANK USA, as
Agent ("Agent") and HSBC BANK USA ("HSBC Bank") and GENERAL
ELECTRIC CAPITAL CORPORATION ("GE Capital") as Lenders
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2000)
10.13 Amendment No. 2 dated as of December 1, 2000 to Loan and Security
Agreement originally dated as of December 28, 1999 among IEC
ELECTRONICS CORP. ("IEC") and IEC ELECTRONICS-EDINBURG, TEXAS
INC.("IEC-Edinburg")(collectively, "Debtor") and HSBC BANK USA,
as Agent ("Agent") and HSBC BANK USA ("HSBC Bank") and GENERAL
ELECTRIC CAPITAL CORPORATION ("GE Capital") as Lenders.
(Incorporated by reference to Exhibit 10.25 of the Company's
Annual Report on Form 10-K for the year ended September 30,
2000).
10.14 Amendment No. 3 dated as of April 24, 2001 to Loan and Security
Agreement originally dated as of December 28, 1999 among IEC
Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc.
("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank
USA ("HSBC Bank") and General Electric Capital Corporation ("GE
Capital"). (Incorporated by reference to Exhibit 10.16 of the
Company's Annual Report on Form 10-K for the year ended September
30, 2001).
10.15 Amendment No. 4 dated as of December 21, 2001 ("Amendment") to Loan
and Security Agreement originally dated as of December 28, 1999 and
originally among IEC Electronics Corp. ("IEC" or "Debtor") and IEC
Electronics-Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA,
as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General
Electric Capital Corporation ("GE Capital") as Lenders.
(Incorporated by reference to Exhibit 10.26 of the Company's
Annual Report on Form 10-K for the year ended September 30,
2001).
10.16 Amendment No. 5 dated as of February 15, 2002 to Loan and Security
Agreement originally dated as of December 28, 1999 among IEC
Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc.
("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank
USA ("HSBC Bank") and General Electric Capital Corporation ("GE
Capital")(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on February 20, 2002).
10.17 Amendment No. 6 dated as of February 28, 2002 to Loan and Security
Agreement originally dated as of December 28, 1999 among IEC
Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc.
("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank
USA ("HSBC Bank") and General Electric Capital Corporation ("GE
Capital")(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on March 6, 2002).
10.18 Amendment No. 7 dated as of March 15, 2002 to Loan and Security
Agreement originally dated as of December 28, 1999 among IEC
Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc.
("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank
USA ("HSBC Bank") and General Electric Capital Corporation ("GE
Capital")(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on March 21, 2002).
10.19 Amendment No. 8 dated as of April 8, 2002 to Loan and Security
Agreement originally dated as of December 28, 1999 among IEC
Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc.
("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC Bank
USA ("HSBC Bank") and General Electric Capital Corporation ("GE
Capital")(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on April 9, 2002).
10.20* Retirement and Deferred Compensation Agreement dated September 30,
1999 between Russell E. Stingel and IEC Electronics Corp.(incor-
porated by reference to Exhibit 10.25 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000)
10.21* Employment Agreement made as of August 11, 2000 between IEC
Electronics Corp. and Thomas W. Lovelock. (Incorporated by
reference to Exhibit 10.27 of the Company's Annual Report on Form
10-K for the year ended September 30, 2000.)
10.22* First Amendment dated as of October 23, 2001 and effective as of
August 21, 2001 to Employment Agreement between IEC Electronics
Corp. and Thomas W. Lovelock. (Incorporated by reference to Exhibit
10.19 of the Company's Annual Report on Form 10-K for the year ended
September 30, 2001).
10.23* Employment Agreement made as of November 1, 2000, effective as of
June 5, 2000, between IEC Electronics Corp. and William Nabors.
(Incorporated by reference to Exhibit 10.28 of the Company's
Annual Report on Form 10-K for the year ended September 30,
2000.)
10.24* First Amendment dated as of August 24, 2001 to Employment Agreement
dated as of November 1, 2000 and effective as of June 5, 2000
between IEC Electronics Corp. and William Nabors. (Incorporated by
reference to Exhibit 10.21 of the Company's Annual Report on Form
10-K for the year ended September 30, 2001).
Page 20 of 44
10.25* Employment Agreement between IEC Electronics Corp. and Bill R.
Anderson dated as of March 29, 2001 (incorporated by reference to
Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 30, 2001).
10.26* Form of Change-in-Control Agreement between IEC Electronics Corp.
and each of its Vice Presidents, dated as of May 1, 1998.
(Incorporated by reference to Exhibit 10.19 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1998.)
10.27* Change-in-Control Agreement dated as of June 6, 2001 between IEC
Electronics Corp. and Randall C. Lainhart. (Incorporated by
reference to Exhibit 10.25 of the Company's Annual Report on Form
10-K for the year ended September 30, 2001).
10.28*+ Severance Agreement dated June 6, 2002 between IEC Electronics
Corp. and Thomas W. Lovelock.
10.29*+ Supplemental Severance Agreement dated December 6, 2002 between
IEC Electronics Corp. and Thomas W. Lovelock.
10.30+ Amendment Number 9 dated as of June 20, 2002 to Loan and Security
Agreement originally dated as of December 28, 1999 among IEC
Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc.
("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC Bank
USA ("HSBC Bank") and General Electric Capital Corporation ("GE
Capital"); Letter Modifications to Amendment Number 9 dated
August 9, 2002, August 23, 2002, September 17, 2002 and September
24, 2002
10.31+ Amendment Number 10 dated as of October 1, 2002 to Loan and
Security Agreement originally dated as of December 28, 1999 among
IEC Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas
Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC
Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE
Capital")
10.32+ Amendment Number 11 dated as of November 13, 2002 to Loan and
Security Agreement originally dated as of December 28, 1999 among
IEC Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas
Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC
Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE
Capital")
10.33+ Amendment Number 12 dated as of January 1, 2003 to Loan and 53
Security Agreement originally dated as of December 28, 1999 among
IEC Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas
Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC
Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE
Capital")
10.34*+ Amendment to IEC Electronics Corp. Savings and Security Plan
effective April 1, 2002
16.1 Arthur Andersen LLP letter dated June 4, 2002 (incorporated by
reference to the Company's Current Report on Form 8-K filed June 4,
2002).
21.1+ Subsidiaries of IEC Electronics Corp.
23.1 Consent of Rotenberg & Co., LLP 42
99.1 Certification of Chief Executive Officer pursuant to Section 906 43
of the Sarbanes-Oxley Act of 2002
99.2 Certification of Principal Financial Officer pursuant to Section 44
906 of the Sarbanes-Oxley Act of 2002
*Management contract or compensatory plan or arrangement
+ Filed with corresponding exhibit number as listed on the Company's Form
10-K for the year ended September 30, 2002 which was filed on January
14, 2003 and incorporated by reference herein.
(b) Reports on Form 8-K
(i) A current report on Form 8-K was filed with the Securities and
Exchange Commission on August 12, 2002. The report contained
information about the engagement of new independent accountants.
(ii) A current report on Form 8-K was filed with the Securities and
Exchange Commission on September 6, 2002. The report contained
information regarding the settlement of the Registrant's litigation
with Acterna Corporation.
(iii) A current report on Form 8-K was filed with the Securities and
Exchange Commission on September 20, 2002. The report contained
information regarding Registrant's failure to comply with certain
NASDAQ Marketplace Rules.
(iv) A current report on Form 8-K was filed with the Securities and
Exchange Commission on October 25, 2002. The report contained
information regarding Amendment No. 10 to Registrant's Loan and
Security Agreement.
(v) A current report on Form 8-K was filed with the Securities and
Exchange Commission on November 1, 2002. The report contained
information regarding (x)Registrant's acceptance of term sheets
involving a refinancing which would repay existing indebtedness to
its lenders and (y) potential delisting of Registrant's securities by
NASDAQ.
Page 21 of 44
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: January 23, 2003.
IEC Electronics Corp.
By:/s/ W. Barry Gilbert
-------------------------
W. Barry Gilbert
Acting Chief Executive Officer and Chairman of the Board
Page 22 of 44
CERTIFICATIONS
I, W. Barry Gilbert, certify that:
1. I have reviewed this annual report on Form 10-K/A of IEC Electronics
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly represent in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 23, 2003 IEC Electronics Corp.
By: /s/ W. Barry Gilbert
------------------------
W. Barry Gilbert
Acting Chief Executive Officer
Page 23 of 44
CERTIFICATIONS
I, Kevin J. Monacelli, certify that:
1. I have reviewed this annual report on Form 10-K/A of IEC Electronics
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly represent in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 23, 2003 IEC Electronics Corp.
By: /s/ Kevin J. Monacelli
--------------------------
Kevin J. Monacelli
Controller &
Principal Financial Accounting
Officer
Page 24 of 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
IEC Electronics Corp.
Newark, New York
We have audited the accompanying consolidated balance sheet of IEC
Electronics Corp. (a Delaware corporation) and subsidiaries as of September 30,
2002, and the related consolidated statements of operations, comprehensive loss
and shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IEC
Electronics Corp. and subsidiaries as of September 30, 2002 and the results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
The financial statements for the years ended September 30, 2001 and 2000
were audited by other auditors who have ceased operations whose report dated
November 16, 2001 (except with respect to the matter discussed in Notes 1 and 5,
as to which the date was January 11, 2002), on those statements included an
explanatory paragraph describing conditions that raised substantial doubt about
the Company's ability to continue as a going concern.
/s/ Rotenberg & Co., LLP
------------------------
Rotenberg & Co., LLP
Rochester, New York
November 20, 2002
(except with respect to the matters discussed in
Notes 7 and 14 as to which the date is January 14, 2003)
Page 25 of 44
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND 2001
(in thousands)
ASSETS
2002 2001
--------------------
CURRENT ASSETS:
Accounts receivable, net of allowance for
doubtful accounts of $146 and $698 $ 5,480 $ 11,114
Inventories 3,412 6,846
Other current assets 186 217
Current assets-discontinued operations 348 9,304
--------------------
Total current assets 9,426 27,481
--------------------
PROPERTY, PLANT AND EQUIPMENT, NET 4,333 5,835
ASSET HELD FOR SALE 497 1,397
LONG-TERM ASSETS-DISCONTINUED OPERATIONS 809 3,414
-----------------------
$ 15,065 $ 38,127
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
2002 2001
-------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,128 $ 13,382
Accounts payable 6,250 5,283
Accrued payroll and related expenses 697 1,518
Other accrued expenses 1,497 2,038
Other current liabilities-discontinued operations 1,426 4,097
-------------------------
Total current liabilities 12,998 26,318
-------------------------
LONG TERM DEBT - TOTAL 1,268 -
-------------------------
TOTAL LIABILITIES 14,266 26,318
-------------------------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per share
Authorized - 500,000 shares;
Issued and outstanding - none - -
Common stock, par value $.01 per share
Authorized - 50,000,000 shares
Issued - 7,692,076 shares 77 77
Treasury stock, 573 shares; at cost (11) (11)
Additional paid-in capital 38,418 38,418
Accumulated deficit (37,640) (26,661)
Accumulated other comprehensive loss-
Cumulative translation adjustments (45) (14)
-------------------------
Total shareholders' equity 799 11,809
--------------------------
$ 15,065 $ 38,127
=========================
The accompanying notes are an integral part of these financial statements.
Page 26 of 44
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(in thousands, except per share and share data)
2002 2001 2000
---------------------------------
Net sales $ 39,365 $114,771 $146,359
Cost of sales 37,068 111,829 136,020
--------------------------------
Gross profit 2,297 2,942 10,339
Operating expenses
Selling and administrative expenses 4,209 7,049 9,364
Restructuring charge (benefit) 214 - (1,044)
Asset impairment writedown 900 12,101 -
--------------------------------
Total operating expenses 5,323 19,150 8,320
--------------------------------
Operating (loss) income (3,026) (16,208) 2,019
Interest and financing expense (932) (1,331) (1,575)
Other income 188 5 1,963
-------------------------------
(Loss) income from continuing operations
before income taxes (3,771) (17,534) 2,406
Provision for (benefit from) income taxes - (95) (5)
--------------------------------
(Loss) income from continuing operations (3,771) (17,439) 2,411
--------------------------------
Discontinued operations:
Loss from operations of IEC-Mexico
disposed of (net of income taxes of
$56, $116 and $0 in 2002, 2001 and
2000, respectively) (4,069) (11,833) (10,442)
Estimated loss on disposal of IEC-Mexico
(net of income taxes of $0) (3,139) - -
--------------------------------
(7,208) (11,833) (10,442)
--------------------------------
Net loss $(10,979) $(29,272) $ (8,031)
================================
Net (loss) income per common and common equivalent share:
Basic and diluted
(Loss) income from continuing operations $(0.49) $(2.28) $ 0.32
Loss from discontinued operations $(0.94) $(1.55) $(1.38)
Loss available to common shareholders $(1.43) $(3.83) $(1.06)
Weighted average number of common and common equivalent shares outstanding:
Basic and Diluted 7,691,503 7,650,673 7,590,046
================================
The accompanying notes are an integral part of these financial statements
Page 27 of 44
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) AND SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(in thousands)
Accumulated
Other
Additional Retained Comprehensive Total
Comprehensive Common Paid-In Earnings Income Treasury Shareholders
Loss Stock Capital (Deficit) (Loss) Stock Equity
----------------------------------------------------------------------------------------------
BALANCE, September 30, 1999 $76 $38,566 $10,642 $(28) $(411) $48,845
Executive signing bonus - (181) - - 200 19
Shares issued in lieu of cash
to suppliers and others - (78) - - 200 122
Shares issued under Directors
Stock Plan - 25 - - - 25
Net Loss $(8,031) - - (8,031) - - (8,031)
Other comprehensive income,
currency translation
adjustments 28 - - - 28 - 28
-----------------------------------------------------------------------------------------------------
(8,003)
=======
BALANCE, September 30, 2000 76 38,332 2,611 - (11) 41,008
Shares issued under Directors
Stock Plan 1 86 - - - 87
Net Loss $(29,272) - - (29,272) - - (29,272)
Other comprehensive loss,
Currency translation
adjustments (14) - - - (14) - (14)
------------------------------------------------------------------------------------------------------
Comprehensive loss $(29,286)
=========
BALANCE, September 30, 2001 77 38,418 (26,661) (14) (11) 11,809
Net loss $(10,979) - - (10,979) - - (10,979)
Other comprehensive loss,
Currency translation
adjustments (31) - - - (31) - (31)
------------------------------------------------------------------------------------------------------
Comprehensive loss $(11,010)
=========
BALANCE, September 30, 2002 $77 $38,418 $(37,640) $(45) $(11) $799
==================================================================================
The accompanying notes are an integral part of these financial statements.
Page 28 of 44
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(in thousands)
2002 2001 2000
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,979) $(29,272) $(8,031)
Non-cash adjustments:
Loss from discontinued operations 4,069 11,833 10,442
Loss on sale of discontinued operations 3,139 - -
Depreciation and amortization 1,637 4,005 5,286
(Gain) loss on sale of fixed assets (6) (4) 17
Goodwill amortization - 324 353
Issuance of directors fees in stock - 87 25
Asset impairment writedown (recovery) 900 12,101 (365)
Changes in operating assets and
liabilities:
Accounts receivable 5,634 6,232 3,281
Inventories 3,434 14,511 2,294
Income taxes receivable - - 2,396
Other current assets 31 (143) 272
Other assets - 292 (284)
Accounts payable 1,469 (4,320) (7,366)
Accrued payroll and related expenses (820) (316) (1,455)
Accrued insurance 119 (253) 774
Other accrued expenses (661) (80) 534
------------------------------
Net cash flows from operating activities 8,092 14,997 8,173
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (190) (3,120) (1,237)
Intercompany asset transfers NBV - - 195
Proceeds from sale of property 61 20 1,294
Utilization of restructuring provision for
building/equipment - (40) (116)
Proceeds from sale of discontinued operations 730 - -
------------------------------
Net cash flows from investing activities 601 (3,140) 136
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in drafts payable (502) (639) -
Net (payments) borrowings on revolving
credit facilities (4,708) (1,884) 824
Principal payments on long-term debt (4,278) (2,105) (1,052)
------------------------------
Net cash financing activities (9,488) (4,628) (228)
------------------------------
Cash from (used in) discontinued operations 951 (7,215) (12,116)
Change in cash and cash equivalents 30 14 (4,035)
Effect of exchange rate changes (30) (14) 28
Cash and cash equivalents, beginning of year - - 4,007
-----------------------------
Cash and cash equivalents, end of year $ - $ - $ -
=============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,461 $1,860 $ 1,996
=============================
Income taxes, net of refunds received $ - $ (95) $ (2,971)
=============================
The accompanying notes are an integral part of these financial statements.
Page 29 of 44
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002, 2001 AND 2000
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-- --------------------------------------------------------
Business
--------
IEC Electronics Corp. (IEC) is an independent EMS provider of complex
printed circuit board assemblies and electronic products and systems. IEC offers
its customers a wide range of manufacturing and management services, on either a
turnkey or consignment basis, including material procurement and control,
manufacturing and test engineering support, statistical quality assurance, and
complete resource management.
Consolidation
-------------
The consolidated financial statements include the accounts of IEC and its
wholly-owned subsidiaries, IEC Electronics-Edinburg, Texas Inc. ("Texas") and
IEC Electronics-Arab, Alabama Inc. ("Alabama"), until January 26, 2000 when each
of Texas and Alabama merged into IEC; IEC Electronics-Ireland Limited
("Longford") from August 31, 1998, until September 4, 2001, when it was merged
into IEC; and IEC Electronicos de Mexico from February 2001, (collectively, the
"Company"). Operations in Alabama were closed in October 1998, in Longford in
December 1999 and in Texas and Mexico in July 2002.
Revenue Recognition
-------------------
The Company recognizes revenue upon shipment of product for both turnkey
and consignment contracts.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less. The Company's cash and cash equivalents are
held and managed by institutions which follow the Company's investment policy.
The fair value of the Company's financial instruments approximates carrying
amounts due to the relatively short maturities and variable interest rates of
the instruments, which approximate current market interest rates.
Accounts Payable
----------------
Trade accounts payable include drafts payable of $302,000 and $804,000 at
September 30, 2002, and September 30, 2001, respectively.
Page 30 of 44
Long-Lived Assets
-----------------
In assessing and measuring the impairment of long-lived assets, the Company
applies the provisions of Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the long-lived asset or identifiable intangible
being tested for impairment was acquired in a purchase business combination, the
goodwill that arose in that transaction is included in the asset grouping in
determining whether an impairment has occurred. If some but not all of the
assets acquired in that transaction are being tested, goodwill is allocated to
the assets being tested for impairment based on the relative fair values of the
long-lived assets and identifiable intangibles acquired at the acquisition date.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Additionally, where an impairment loss is recognized
for long-lived assets and identifiable intangibles where goodwill has been
allocated to the asset grouping, as described immediately above, the carrying
amount of the allocated goodwill is impaired (eliminated) before reducing the
carrying amounts of impaired long-lived assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
With respect to the carrying amounts of goodwill, if any, remaining after
the testing for impairment of long-lived assets and identifiable intangibles,
including enterprise level goodwill not subject to impairment testing under SFAS
No. 121, the Company assesses such carrying value for impairment whenever events
or changes in circumstances indicate that the carrying amount of such goodwill
may not be recoverable. The Company assesses the recoverability of this goodwill
by determining whether the amortization of goodwill over its remaining life can
be recovered through undiscounted future operating cash flows of the acquired
business. The amount of goodwill impairment, if any, is measured based on
projected discounted operating cash flows compared to the carrying value of such
goodwill.
During the fourth quarter of 2001, certain fixed assets and intangible
assets were identified as impaired. As a result of the overall softening of the
electronics manufacturing services industry and a change in the Company's
business strategy, the Company did not believe that their future cash flows
supported the carrying value of the long-lived assets and goodwill. The current
market values were compared to the net book value of the related long-lived
assets with the difference representing the amount of the impairment loss. The
effect of this impairment recognition totaled approximately $12.6 million, of
which $9.6 million represented a writeoff of goodwill and $3.0 million
represented a writedown of property, plant and equipment.
During August 1998, IEC initiated a plan to dispose of its Arab, Alabama
facility. In conjunction with this decision, the asset was written down to its
estimated recoverable sales value, net of commissions. The effect of this
impairment recognition totaled approximately $900,000 for fiscal year 2002. The
facility is recorded at its carrying value of $497,000 at September 30, 2002.
During April 2001, IEC initiated a plan to dispose of its Edinburg, Texas
facility. In conjunction with this decision, the asset was written down to its
estimated recoverable sales value, net of commissions. The effect of this
impairment recognition totaled approximately $1.04 million in fiscal 2002. The
facility is recorded at its carrying value of $800,000 at September 30, 2002.
Fair Value of Financial Instruments
-----------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical to estimate
that value.
Current Assets and Liabilities - The carrying amount of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of the short maturity of those instruments.
Debt - The fair value of the Company's debt is estimated based upon the
quoted market prices for the same or similar issues which approximates its
carrying amount.
Page 31 of 44
Costs in Excess of Net Assets Acquired
--------------------------------------
Costs in excess of net assets acquired of $14.1 million were being
amortized on a straight-line basis over 40 years. Amortization of $324,000 and
$353,000 was charged against operations for the years ended September 30, 2001
and 2000, respectively.
The remaining net goodwill in the amount of $9.6 million, related to the
Newark operations was written off in fiscal 2001. The write-off of net goodwill
in the amount of $670,000, related to the Longford operations, was charged to
the restructuring reserve in fiscal 1999. The write-off of net goodwill of
approximately $1.3 million during fiscal 1998, related to the Alabama facility,
was charged to the restructuring reserve. See Note 6.
Earnings Per Share
------------------
Net income (loss) per common share is computed in accordance with SFAS No.
128, "Earnings Per Share". Basic earnings per common share is calculated by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for each period. Diluted earnings per common share
is calculated by adjusting the weighted-average shares outstanding assuming
conversion of all potentially dilutive stock options, warrants and convertible
securities.
Foreign Currency Translation
----------------------------
The assets and liabilities of the Company's foreign subsidiary are
translated based on the current exchange rate at the end of the period for the
balance sheet and weighted-average rate for the period for the statement of
operations. Translation adjustments are recorded as a separate component of
equity. Transaction gains or losses are included in operations.
Comprehensive Income
--------------------
Comprehensive income (loss) consists of net income (loss) and foreign
currency translation adjustments and is presented in the statements of
comprehensive income (loss) and shareholders' equity.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Pronouncements
------------------
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("FAS 142"), "Goodwill and Other
Intangible Assets." FAS No. 142 requires that ratable amortization of goodwill
be replaced with periodic tests of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. The provisions
of FAS No. 142 became effective for fiscal years beginning after December 15,
2001; however, as the Company wrote-off all goodwill during fiscal 2001,
adoption of this pronouncement will have no impact on the Company.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). We have adopted this standard on October 1, 2002.
Upon adoption of SFAS No. 143, the fair value of a liability for an asset
retirement obligation will be recognized in the period in which it is incurred.
The associated retirement costs will be capitalized as part of the carrying
amount of the long-lived asset and subsequently allocated to expense over the
asset's useful life. Management does not expect the adoption of SFAS No. 143 to
have a material effect on the financial results of the Company.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS No. 144"). FAS No. 144 supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". FAS No. 144 applies to all long-lived
assets (including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business". FAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001, and will thus be adopted by the Company, as required, on October 1, 2002.
Management is currently determining what effect, if any, FAS No. 144 will have
on its financial position and results of operations.
Page 32 of 44
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4,
44,and 64, Amendment of FASB Statement No. 13, and technical Corrections (SFAS
No. 145). SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the
provisions of Opinion No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual and infrequent and
meet the criteria for classification as an extraordinary item. SFAS No. 145 is
effective for the Company beginning January 1, 2003. Management does not expect
the adoption of SFAS No. 145 to have a material effect on the financial results
of the Company.
In June 2002, the Financial Accounting Standards Board issued FASB
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" (SFAS 146). SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Costs covered by
SFAS 146 include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. SFAS 146 applies to all exit or disposal
activities initiated after December 31, 2002. Management does not anticipate
that the adoption of SFAS 146 will have any material impact on the financial
statement.
In October 2002, the Financial Accounting Standards Board issued FASB
Statement No. 147, "Accounting for Acquisitions of Certain Financial
Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9" (SFAS 147). SFAS 147 amends SFAS 72 and no longer requires
companies to recognize, and subsequently amortize, any excess of the fair value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. In addition,
SFAS 147 amends SFAS 144 to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor and borrower
relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that SFAS 144 requires for other long-lived assets that are held and
used. Management does not anticipate that the adoption of SFAS 147 will have any
material impact on the financial statements.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. INVENTORIES
-------------------
Inventories are stated at the lower of cost (first-in, first-out) or
market. The major classifications of inventories are as follows at period end
(in thousands):
2002 2001
------ -------
Raw Materials $ 2,175 $ 4,318
Work-in-process 1,214 2,103
Finished goods 23 425
------- -------
$ 3,412 $ 6,846
======= =======
Page 33 of 44
3. PROPERTY, PLANT, AND EQUIPMENT
---------------------------------
Property, plant, and equipment are stated at cost and are depreciated over
various estimated useful lives using the straight-line method.
Maintenance and repairs are charged to expense as incurred; renewals and
improvements are capitalized. At the time of retirement or other disposition of
property, plant, and equipment, the cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in other income.
The major classifications of property, plant, and equipment are as follows
at September 30 (in thousands):
2002 2001
-------- --------
Land and land improvements $ 768 $ 768
Buildings and improvements 3,995 4,244
Machinery and Equipment 46,501 46,552
Furniture and fixtures 5,850 5,606
-------- --------
$57,114 $57,170
Less- Accumulated depreciation
and amortization (52,781) (51,335)
-------- --------
$ 4,333 $ 5,835
======== ========
Depreciation and amortization was $1.6 million, $4.0 million, and $5.3
million for the years ended September 30, 2002, 2001 and 2000, respectively.
The principal depreciation and amortization lives used are as follows:
Estimated
Description Useful
Lives
---------------------------- ------------
Land improvements 10 years
Buildings and improvements 5 to 40 years
Machinery and equipment 3 to 5 years
Furniture and fixtures 3 to 7 years
4. ASSET HELD FOR SALE
----------------------
Included in asset held for sale are land and land improvements with a net
book value of approximately $114,000 and buildings and improvements with a net
book value of approximately $383,000.
5. DISCONTINUED OPERATIONS
------------------------------
On June 18, 2002, the Company signed an Asset Purchase Agreement to sell
substantially all of the assets of IEC-Mexico to Electronic Product Integration
Corporation (EPI) for $730,000 plus payments of an Earn-out Amount, based upon
sales revenues received by EPI from certain former customers of the Company
during the period between July 1, 2002 and January 31, 2003, in an amount up to
$700,000. In addition, EPI will pay to the Company commissions based on the net
selling price of products shipped to certain former customers of the Company
during various time periods between June 18, 2002 and March 31, 2003. As of
September 30, 2002 no additional amounts were earned under the agreement. Under
the terms of a related agreement, the Company and IEC-Mexico were also released
of all of their lease obligations to the landlord of the Mexican facility. EPI
paid the Company $315,000 in June 2002, $265,000 in July 2002 and $150,000 in
September 2002. The Company recorded an after-tax loss on the sale of the
business of approximately $3.1 million. The reserve balance at September 30,
2002 was $421,000. It is anticipated that all remaining charges against the
accrual will be made by September 2003. The Consolidated Financial Statements
and related notes have been restated, where applicable, to reflect IEC-Mexico as
a discontinued operation.
Net sales of IEC-Mexico were $10.8 million, $45.9 million and $57.8 million
for the years ended September 30, 2002, 2001 and 2000 respectively. These
amounts are not included in net sales in the accompanying consolidated
statements of operations.
Page 34 of 44
Assets and liabilities of IEC-Mexico to be disposed of consisted of the
Following at September 30:
2002 2001
---------- ----------
Accounts receivable $ 141,075 $3,812,779
Inventories - 5,185,977
Other current assets 206,746 305,147
--------- ----------
Total current assets 347,821 9,303,903
Property, plant and equipment, net 800,000 3,405,005
Other assets 9,166 9,166
--------- ----------
Total non-current assets 809,166 3,414,171
--------- ----------
Total assets $1,156,987 $12,718,074
========== ===========
Accounts payable $ 668,232 $ 2,183,941
Accrued payroll and related expenses 37,044 496,916
Other accrued expenses 720,222 1,416,496
---------- -----------
Total current liabilities $1,425,498 $4,097,353
========== ===========
Net assets to be disposed of $ (268,511) $8,620,721
=========== ===========
6. RESTRUCTURING
-------------------
In June 2002, the Company's Board of Directors approved a restructuring and
reduction of workforce plan at its Newark, NY facility. At this time, the
Company's President, Chief Executive Officer and a director of the Company and
the Company's Chief Financial Officer and Treasurer also resigned their
positions with the Company. Each elected not to continue in the management of a
restructured and downsized company. In connection with this restructuring, the
Company recorded a $448,000 charge to earnings in fiscal 2002 relating primarily
to severance. As of September 30, 2002, a reserve balance of approximately
$215,000 still remained. It is anticipated that all remaining charges against
the accrual will be made by October 2003.
In April 2001, the Company's Board of Directors approved a restructuring
plan to consolidate its Texas and Mexico business operations including reducing
its cost structure and improving working capital. As part of the
business-restructuring plan, the Company recorded a charge to earnings, which is
now reflected in discontinued operations, of $1.4 million in the third quarter
of fiscal 2001. This restructuring plan allowed the Company to concentrate its
investments, resources and management attention on lower cost, high volume
production at its Mexico operations. The charge related to facility
consolidations ($1.0 million) and headcount reductions ($400,000). As of
September 2002, a reserve balance of approximately $168,000 still remained. It
is anticipated that all remaining charges against the accrual will be made
within the next twelve months. There have been no significant reallocations or
re-estimates of this restructuring charge to date.
In September 1999, the Company announced its plan to close its
underutilized Longford operations and transfer some of the customers served
there to its other operations in New York and Texas. Accordingly, a
restructuring charge of approximately $4.0 million was recorded in the fourth
quarter of fiscal 1999. The components of the charge are as follows: the
write-down of assets to be disposed of to their fair market value ($1.1
million), the write-down of goodwill ($670,000), severance and employee benefits
($619,000), accrual of the remaining lease payments and related building
maintenance costs ($895,000), and repayment of a grant provided by the Irish
Development Agency ($681,000). In February 2000, a third party purchased from
the Company certain assets of Longford and assumed the lease of the Longford
facility. This resulted in a benefit of $1.0 million from the reversal of a
previously established restructuring reserve which included $800,000 relating to
the lease and $200,000 recovered from a guarantee which had been executed by the
company from whom the assets in Longford had been purchased. The Company
recorded charges against the accrual of approximately $54,000 and $2.2 million
during fiscal 2001 and 2000, respectively. There is no remaining balance at
September 30, 2002.
Page 35 of 44
In August 1998, the Company announced its plan to close its underutilized
Alabama facility and transferred the facility's customers to the Company's other
operations in New York and Texas. Accordingly, a restructuring charge of $4.7
million was recorded in the fourth quarter of fiscal 1998. The components of the
charge were as follows: the write-down of assets to be disposed of to their fair
market value ($2.2 million), the write-down of goodwill ($1.3 million), and
severance and employee benefits ($1.2 million). Due to the pending sale of the
facility, a benefit of approximately $240,000 was recorded in fiscal 2002
resulting from the reversal of a previously established restructuring reserve
which related to building maintenance costs. The Company recorded charges
against the accrual of $85,000 and $200,000 in fiscal 2001 and 2000,
respectively.
7. LONG-TERM DEBT:
---------------------
Long-term debt consists of the following at September 30 (in thousands):
2002 2001
------- -------
Senior debt facility $ 1,976 $ 13,382
Term loan 2,420 -
Less - Current portion (3,128) (13,382)
-------- -------
$ 1,268 $ -
======== =======
As of September 30, 2001, the Company was not in compliance with certain
financial covenants under its secured asset-based credit agreement. As of
December 21, 2001, the Company's banks waived the non-compliance, amended
certain covenants to allow the Company more flexibility and changed the
expiration date of the credit agreement to February 15, 2002 from January 31,
2003. Subsequent amendments were made to the credit agreement as of February 15,
2002, February 28, 2002, March 15, 2002, April 8, 2002, June 20, 2002, October
1, 2002, November 12, 2002 and January 1, 2003 which, among other things,
continued to extend the expiration date of the credit agreement. As a result of
the January 1, 2003 amendment, the expiration date of the credit agreement was
January 17, 2003.
As last amended, the credit agreement provided for a revolving credit
facility component of $1.0 million. Amounts borrowed were limited to 85% of
qualified accounts receivable. The interest rate on the revolving credit
facility was increased at the time of the various amendments and on September
30, 2002 was prime rate plus 3.50%. On January 14, 2003, it was prime rate plus
6.00%.
The second component of the credit facility consisted of a $10 million
three-year term loan with monthly principal installments based on a five-year
amortization which began in April 2000. The interest rate on the term loan
facility was increased at the time of the various amendments and at September
30, 2002 was prime rate plus 4.00%. On January 14, 2003, it was prime rate plus
6.00%.
At September 30, 2002, $3.6 million was outstanding, consisting of $1.1
million and $2.5 million relating to the revolving credit facility and term
loan, respectively, with an additional $403,000 available under the revolving
credit facility. At January 6, 2003, the availability under the revolver was $0,
and $611,000 was outstanding on the revolver and $1.1 million was outstanding on
the term loan.
On January 14, 2003, the Company completed a new $7,300,000 financing
composed of a $5,000,000 Senior Secured Facility with Keltic Financial Partners
LLP ("Keltic"), a $2,200,000 Secured Term Loan with SunTrust Bank ("SunTrust")
and a $100,000 infusion by certain of the Company's directors. The Keltic
Facility, which has a 3 year maturity, bears interest at the rate of prime plus
2%. It involves a revolving line of credit for up to $3,850,000 based upon
advances on eligible accounts receivable and inventory, a term loan of $600,000,
secured by machinery and equipment, to be amortized over a 36 month period and a
term loan of $550,000 secured by a first mortgage lien against the Company's
Edinburg, Texas real estate which loan is due at the earlier of the sale of that
real estate or one year from the date of closing. The SunTrust Term Loan is
secured by a general security agreement, and indirectly by the assignment of a
certain promissory note and a first mortgage on the Company's plant in Newark,
New York. It is payable with interest at prime plus 1.5% in monthly installments
over a period of 3 years. Of the funds provided by the new financing, $1,540,016
was used to repay all but $100,000 of indebtedness to the Company's prior
lenders, HSBC USA as agent for itself and GE Capital Corporation, who will
retain a subordinated interest in substantially all of the Company's assets
until the Texas real estate is sold. On January 14, 2003, following the
completion of the financing, the availability under the revolver was $1,200,000.
The Keltic and Suntrust loan agreements contain various affirmative and negative
covenants including, among others, limitations on the amount available under the
revolving line of credit relative to the borrowing base, capital expenditures,
fixed charge coverage ratios, and minimum earnings before interest, taxes,
depreciation and amortization (EBITDA). In connection with the financing, The
Company entered into agreements with certain of its trade creditors providing
for extended payment terms involving an aggregate of approximately $2,000,000 of
past due balances.
Page 36 of 44
8. LIFE INSURANCE PROCEEDS:
------------------------------
The Company's former President and Chief Executive Officer died suddenly on
December 11, 1999. In the second quarter of fiscal 2000, the Company received
non-taxable income from insurance proceeds of approximately $2.0 million, which
is included in other income.
9. INCOME TAXES:
-------------------
The provision for (benefit from) income taxes in fiscal 2002, 2001 and 2000
is summarized as follows (in thousands):
2002 2001 2000
------- ------- -------
Current
Federal $ - $ - $ -
State/Other - (95) (5)
Deferred - - -
-------- --------- --------
Provision for (benefit from)
income taxes, net $ - $ (95) $ (5)
======== ========= ========
The components of the deferred tax asset (liability) at September 30 are as
follows (in thousands):
2002 2001
---- ----
Net operating loss and AMT credit carryovers $ 8,472 $ 8,167
Asset impairment loss 1,688 1,030
Accelerated depreciation (1,067) (1,255)
New York state investment tax credits 3,237 3,435
Compensated absences 119 293
Inventories 985 3,609
Receivables 151 323
Restructuring reserve 470 711
Other 666 41
------ -------
14,721 16,354
Valuation allowance (14,721) (16,354)
------- -------
$ - $ -
======== =======
A full valuation allowance has been established against the net deferred
tax asset due to recent losses and tax carryback limitations. The Company has a
net operating loss carryforward of $26.2 million (expiring in years through
2022). The Company has available approximately $4.9 million in New York State
investment tax credits (expiring in years through 2017).
The differences between the effective tax rates and the statutory federal
income tax rates for fiscal years 2002, 2001 and 2000 are summarized as follows:
2002 2001 2000
----- ----- -----
Benefit from income taxes
at statutory rates (34.0)% (34.0)% (34.0)%
Goodwill adjustments - 14.1 1.5
Provision for state taxes, net - - -
Life Insurance - - (8.5)
Other 0.1 0.9 1.8
Valuation Allowance 33.9 19.0 39.2
----- ----- ------
- % - % -%
===== ===== ======
10. SHAREHOLDERS' EQUITY:
----------------------------
Stock-Based Compensation Plans
In November 1993, the Company adopted the 1993 Stock Option Plan (SOP)
which replaced and superseded the 1989 Stock Option Plan.
Under the SOP, a total of 1,400,000 shares were reserved for key employees,
officers, directors and consultants. The option price for incentive options must
be at least 100 percent of the fair market value at date of grant, or if the
holder owns more than 10 percent of total common stock outstanding at the date
of grant, then not less than 110 percent of the fair market value at the date of
grant. Stock options issued prior to 1992 terminate 10 years from date of grant,
while incentive and nonqualified stock options issued subsequent to 1991
terminate seven and five years from date of grant, respectively.
Page 37 of 44
In December 2001, the Board of Directors authorized the 2001 Stock Option
and Incentive Plan, reserving 1,500,000 shares of common stock for issuance to
directors, officers, consultants or independent contractors providing services
to the Company and key employees. The option price for incentive options must be
at least 100 percent of the fair market value at date of grant, or if the holder
owns more than 10 percent of total common stock outstanding at the date of
grant, then not less than 110 percent of the fair market value at the date of
grant. The Plan was approved by shareholders in February 2002. In conjunction
with the approval of this plan, no further grants will be made under the 1993
SOP and the 1993 SOP was terminated. Stock options issued under this plan
terminate five years from date of grant.
Generally, incentive stock options granted during the period between July
1995 through June 2002 vest in increments of 25 percent. Incentive stock options
granted in July 2002 vest in increments of 50%. Nonqualified stock options
granted during fiscal years 1999 to 2002 vest in increments of 33 1/3 percent.
Changes in the status of options under the SOP at September 30, are
summarized as follows:
Weighted
Shares Average
Under Exercise Available
September 30, Option Price for Grant Exercisable
------------- ---------- -------- -------- -----------
1999 624,497 8.38 684,503 367,372
Options granted 378,000 2.04
Options exercised - -
Options forfeited (130,122) 7.39
----------
2000 872,375 5.78 436,625 490,917
Options granted 493,450 1.33
Options exercised - -
Options forfeited (303,125) 7.68
----------
2001 1,062,700 3.17 246,300 414,226
Options authorized 1,500,000
Options terminated (246,300)
Options granted 338,250 0.07
Options exercised - -
Options forfeited (530,100) 2.68
----------
2002 870,850 2.27 1,171,250 362,283
==========
The following table summarizes information about stock options outstanding as of
September 30, 2002:
Options Outstanding Options Exercisable
-------------------------------------- --------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
Range of at Remaining Average at Average
Exercise September 30, Contractual Exercise September 30, Exercise
Prices 2002 Life Price 2002 Price
-------------- ---------------- ---------- --------- ---------------- ---------
$ 0.070 328,750 4.797 $ 0.070 25,000 $ 0.070
$ 0.520 -$ 0.700 44,500 5.764 $ 0.549 13,750 $ 0.536
$ 1.240 -$ 1.500 187,000 4.646 $ 1.370 86,333 $ 1.413
$ 1.625 -$ 1.875 99,400 4.961 $ 1.664 37,225 $ 1.695
$ 2.500 -$ 3.875 43,700 3.446 $ 3.633 33,225 $ 3.644
$ 6.250 86,000 1.082 $ 6.250 86,000 $ 6.250
$ 9.500 -$ 9.750 77,000 0.768 $ 9.575 77,000 $ 9.575
$16.500 4,500 0.137 $ 16.500 3,375 $ 16.500
------------- ------------
870,850 361,908
============= ============
Page 38 of 44
The weighted average fair value of options granted during fiscal 2002, 2001
and 2000 was $.05, $.97 and $1.33, respectively. The fair value of options is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions: risk-free interest rate of 4.40
percent, 5.19 percent and 6.21 percent, for fiscal 2002, 2001 and 2000,
respectively; volatility of 57.68 percent, 78.76 percent and 58.27 percent for
fiscal 2002, 2001 and 2000, respectively; and expected option life of 5.0 years,
6.7 years and 7.0 years for fiscal 2002, 2001 and 2000, respectively. The
dividend yield was 0 percent. Forfeitures are recognized as they occur.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and the disclosure only provisions of SFAS No.
123 "Accounting for Stock-Based Compensation". Accordingly, no compensation
expense has been recognized for its stock-based compensation plans. Had the
Company recognized compensation cost based upon the fair value at the date of
grant for awards under its plans consistent with the methodology prescribed by
SFAS No. 123, net loss and net loss per common and common equivalent share would
have been as follows for years ended September 30 (in thousands, except per
share data):
2002 2001 2000
---------------- --------------- ---------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ------ -------- ------- ------- -------
Net loss $(10,979) $(10,940) $(29,272) $(29,503) $(8,031) $(8,461)
========= ======== ======== ========= ======= =======
Net loss per common and common equivalent share:
Basic and Diluted $ (1.43) $ (1.42) $ (3.83) $ (3.86) $ (1.06) $ (1.11)
======== ======== ========= ========= ======= ========
Because the SFAS No. 123 method of accounting had not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Treasury Stock
During fiscal 2000, the Company issued 20,000 shares out of treasury for
services rendered and executive signing bonus. The treasury balance is 573
shares with a book value of $11,000.
11. MAJOR CUSTOMERS AND CREDIT RISK CONCENTRATIONS:
------------------------------------------------------
Financial instruments which potentially subject the Company to
concentrations of a significant credit risk consist primarily of cash, cash
equivalents, and trade accounts receivable. The Company has concentrations of
credit risk due to sales to its major customers.
The Company's revenues are derived primarily from sales to North American
customers in the industrial and telecommunications industries and are
concentrated among specific companies. For the fiscal year ended September 30,
2002, two customers accounted for 44 percent and 23 percent of the Company's net
sales. For the fiscal year ended September 30, 2001, four customers accounted
for 18 percent, 17 percent, 15 percent and 14 percent of the Company's net
sales. For the fiscal year ended September 30, 2000, two customers accounted for
49 percent and 16 percent of the Company's net sales.
At September 30, 2002, amounts due from three customers represented 34
percent, 26 percent and 20 percent of trade accounts receivable. At September
30, 2001, amounts due from three customers represented 30 percent, 22 percent
and 20 percent of trade accounts receivable. The Company performs ongoing credit
evaluations of its customers' financial positions and generally does not require
collateral.
Page 39 of 44
12. COMMITMENTS AND CONTINGENCIES:
----------------------------------
Lease Commitments
In December, 1998, the Company entered into a Shelter Services Agreement
with a Texas Limited Partnership and its Mexican corporate subsidiary which
leased 50,000 square feet in a newly constructed industrial park in Reynosa,
Mexico. This Maquiladora facility thereafter commenced manufacturing printed
circuit board assemblies and wire harnesses, and began shipping in April 1999 as
IEC Electronicos de Mexico.
Effective February 1, 2001, the Company terminated the Shelter Services
Agreement and exercised its option to acquire the Mexican subsidiary of the
Texas Limited Partnership for one U.S. dollar ($1.00). On March 28, 2001, the
subsidiary, now wholly owned by the Company, executed a new five-year lease
agreement with a five-year renewal option combining the original 50,000 square
feet with an additional 62,000 square feet at the Reynosa facility. Effective
May 1, 2001, the Mexican subsidiary, IEC Electronicos de Mexico, S. De R.L. De
C.V. occupied the entire 112,000 square foot facility.
In June 2002, in conjunction with the sale of IEC-Mexico, IEC and
IEC-Mexico were released of all their lease obligations related to the Mexican
facility.
Rental expense for the Mexico facility was $54,000, $465,000 and $312,000
for fiscal 2002, 2001 and 2000, respectively. These amounts are included in
discontinued operations.
As of September 30, 2002, the Company was obligated under non-cancelable
operating leases, primarily for manufacturing and office equipment. These leases
generally contain rental options and provisions for payment of the lease for
executory costs (taxes, maintenance and insurance). Rental expenses on equipment
were $352,000, $178,000 and $91,000 for fiscal 2002, 2001 and 2000,
respectively. The lease for the manufacturing equipment expires in fiscal 2003
with required monthly payments of $23,000 through January 2003.
Litigation
----------
The Company is from time to time subject to routine legal proceedings and
claims which arise in the ordinary course of its business. Although occasional
adverse decisions (or settlements) may occur, the Company believes that the
final disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
On August 12, 2002, an action was commenced in United States District Court
for the Southern Division of Texas (Civil Action No. M-02-358) against the
Company and several other corporate defendants. The plaintiffs (Armando Gonzalez
and Maria Sylvia Gonzalez, husband and wife, as Next Friends of Adrian Gonzalez,
a Minor, et al.) allege a "toxic tort" action against the defendants, for
exposure to lead, lead dust, chemicals and other substances used in the
manufacture of products by the defendants. The essence of the complaint relates
to alleged "in utero" exposure to the circulatory system of the then unborn
children, resulting in alleged tissue toxicity through the mothers, causing
damage to the central nervous system, brain and other organs of the fetus. The
complaint alleges theories of negligence, gross negligence, strict liability,
breach of warranty and fraud/negligent misrepresentation, and claims unspecified
damages for pain and suffering, a variety of special damages, punitive damages
and attorneys fees. An answer has been filed denying liability on the part of
the Company. Discovery has not begun, and no trial date has been set. Royal &
Sunalliance Insurance Company has agreed to provide a defense of the claims with
a reservation of rights, but has expressly excluded any coverage for the claim
for punitive damages.
13. RETIREMENT PLAN:
--------------------
The Company has a retirement savings plan, established pursuant to Sections
401(a) and 401(k) of the Internal Revenue Code. This plan is for the exclusive
benefit of its eligible employees and beneficiaries. Eligible employees may
elect to contribute a portion of their compensation each year to the plan.
Effective June 1, 1998, The Board of Directors approved a change in the employer
match from 33 percent of the amount contributed by participant to 100 percent of
the first 3 percent of employee contributions, and 50 percent of the next 3
percent of employee contributions. The match is discretionary and was suspended
indefinitely as of October 1, 2001. There was no matching contribution made for
fiscal 2002. The matching Company contributions were approximately $608,000 and
$464,000 for the years ended September 30, 2001 and 2000, respectively. The plan
also allows the Company to make an annual discretionary contribution determined
by the Board of Directors. There were no discretionary contributions for fiscal
2002, 2001, or 2000.
Page 40 of 44
14. SUBSEQUENT EVENTS
----------------------
Subsequent to year end, the Company successfully completed the sale of its
Arab, Alabama facility for approximately $600,000. The net proceeds from this
sale resulted in an immaterial gain which will be recognized in the first
quarter of fiscal 2003.
Subsequent to year end, to assist with its liquidity, the Company was able
to generally extend the payment dates of its accounts payable and in the case of
certain of its principal vendors, either negotiated or is in the process of
negotiating, discounted payment terms. The resulting gain from the discounted
payment terms will be recognized in the first quarter of fiscal 2003.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- ----------
(in thousands, except per share data)
YEAR ENDED SEPTEMBER 30,2002:
Net sales $11,209 $13,478 $ 6,038 $ 8,640
Gross profit (loss) 379 (269) 416 1,771
Net (loss) income from
continuing operations (1,073) (2,394) (1,697) 1,393 (1)
Net (loss) income from
discontinued IEC-Mexico
operations (1,089) (1,436) (5,171) 488 (2)
Net (loss) income (2,162) (3,830) (6,868) 1,881
Basic and diluted EPS
Continuing operations (.14) (.31) (.22) .18
Discontinued IEC-Mexico
operations (.14) (.19) (.67) .06
------ ------ ------ --------
Net (loss) income $ (0.28) $(0.50) $(0.89) $ 0.24
====== ====== ====== ========
YEAR ENDED SEPTEMBER 30,2001:
Net sales $44,712 $31,133 $28,191 $10,735
Gross profit (loss) 2,996 2,654 1,704 (4,412)
Net income (loss) from
continuing operations 927 610 (237) (18,739)
Net loss from discontinued
IEC-Mexico operations (2,452) (1,567) (2,972) (4,842)
Net loss (1,525) (957) (3,209) (23,581)
Basic and diluted EPS
Continuing operations .12 .08 (.03) (2.45)
Discontinued IEC-Mexico
operations (.32) (.21) (.39) (.63)
------ ------ ------ --------
Net loss $ (.20) $(0.13) $(0.42) $(3.08)
====== ====== ====== ========
(1) Included in this amount for the fourth quarter is the $1.1 million
received from Acterna Corporation as discussed in Management's Discussion and
Analysis in Item 7.
(2) Included in this amount for the fourth quarter is the $1.3 million
reversal of the estimate to dispose of IEC-Mexico offset by the $1.0 million
write down of the Texas facility as discussed in Management's Discussion and
Analysis in Item 7.
Page 41 of 44